Investors are unwinding the biggest ‘carry trade’ the world has ever seen, SocGen strategist says

A rapid unloading of "carry trades" extended on Monday, with market participants seeking to roll back on the popular strategy amid a dramatic global sell-off in risk assets.

Carry trades refer to operations wherein an investor borrows in a currency with low interest rates, such as the Japanese yen, and reinvests the proceeds in higher-yielding assets elsewhere. The trading strategy has been hugely popular in recent years.

Traditional safe-haven assets, such as the yen and the Swiss franc, surged on Monday, fueling speculation that some investors were seeking to quickly unload profitable carry trades to cover their losses elsewhere.

"You can't unwind the biggest carry trade the world has ever seen without breaking a few heads. That is the impression markets give us this morning," Kit Juckes, chief foreign exchange strategist at Societe Generale, said in a research note published Monday.

Juckes said that a recent batch of weaker-than-expected U.S. economic data, including the labor market report of Friday, manufacturing data and few other soft indicators, had sparked "a huge reaction" in a thin August market.

"That's the easy bit to understand. The tougher question is what happens next," he added.

Juckes flagged that the biggest foreign exchange market reaction was still one of "position reduction." He said long positions against the Japanese yen for the Australian dollar, British pound, Norwegian krone and U.S. dollar were all being taken off.

A push below 140 a dollar for the Japanese yen in the near term "would be unsustainable given the impact on equities and inflation," Juckes said.

The Japanese currency has risen sharply against the U.S. dollar in recent weeks, trading at 143.36 per dollar at 4:35 p.m. London time on Monday.